I am pleased to present this report of the Committee’s inquiry into the external scrutiny of the Australian Taxation Office (ATO). The ATO is one of the most important public agencies. By collecting revenue, it enables much of our system of government.

The ATO is subject to a substantial degree of scrutiny. Its scrutineers include the Auditor-General, the Inspector-General of Taxation, parliamentary committees, the courts, and the Administrative Appeals Tribunal. Jurisdiction for complaints about tax administration was transferred in May 2015 from the Commonwealth Ombudsman to the Inspector-General. However, the Ombudsman retains jurisdiction for other ATO complaints.

Different agencies are subject to scrutiny from the same organisations, except for the Inspector-General, who covers only the ATO and the Tax Practitioners’ Board. However, the importance of the ATO means that scrutineers often allocate more resources to it. For example, approximately 10 per cent of the Auditor-General’s performance audits cover the ATO.

The performance of the ATO is critical to our system of government and external scrutiny helps underpin this performance. Further, the ATO has a wide range of powers and resources. External scrutiny helps ensure that the ATO implements its mandate fairly, effectively and efficiently.

The terms of reference asked the Committee to consider in detail the issues of duplication and overlap, cost to government, and differential regulation. After considering these, the Committee has agreed that no substantial changes are required in the external scrutiny of the ATO. The Committee has, however, made some administrative recommendations to make it clearer how the scrutineers co-ordinate their work.

I would like to make two overall points in relation to the inquiry. The first is that the Committee supports the work of external scrutineers in relation to the ATO.

viii

The tax system is complex, the ATO has considerable resources and strong powers, and the cost and practicalities of the court system mean it is not available to most taxpayers. The scrutineers have integrity and expertise. Taxpayers and the Parliament benefit greatly from their work.

Secondly, the quality of communication between the ATO and the Inspector-General of Taxation appears to be problematic. The Committee has recommended that these parties redouble their efforts to improvement communication before, during and after reviews. I would personally add that the Inspector-General and the ATO could also look at occasions to engage in dialogue more widely; not just around reviews. My understanding is that both sides would welcome such an opportunity.

The Committee has greatly benefitted during the inquiry from the views of stakeholders, the scrutineers and the ATO. The Committee very much appreciates the time, effort and expertise that stakeholders applied to their submissions. The Committee also appreciates the contribution made by witnesses at the hearings and their readiness to engage with the Committee.

Finally, I would to thank my colleagues on the Committee for their support and assistance during the inquiry.

Bert van Manen Chair

Membership of the Committee

Chair Mr Bert van Manen MP

Deputy Chair Hon Bernie Ripoll MP

Members Hon Bronwyn Bishop MP Ms Clare O’Neil MP

Ms Terri Butler MP Mr Michael Sukkar MP

Mr Andrew Hastie MP

Mr Steve Irons MP

Mr Tim Watts MP

Mr Matt Williams MP (until 22/2/16)

x

Committee Secretariat

Secretary Mr David Brunoro

Inquiry Secretary Mr David Monk

Research Officer Dr Anne Holmes

Administrative Officer Ms Tamara Palmer

Terms of reference

The Committee will inquire into the scrutiny arrangements that apply to the Australian Taxation Office (ATO), with particular regard to:

ï® removing inefficiency and duplication

ï® reducing cost to government

ï® the ‘earned autonomy principle’ set out in Stage 2 of the Public

Management Reform Agenda.

The review should not include the Australian National Audit Office role in the auditing of the ATO’s financial statements.

List of abbreviations

AAT Administrative Appeals Tribunal

AFMA Australian Financial Markets Association

AFTS Australia’s Future Tax System

ANAO Australian National Audit Office

APSC Australian Public Service Commission

APRA Australian Prudential Regulation Authority

ASIC Australian Securities and Investments Commission

ATO Australian Taxation Office

CAANZ Chartered Accountants of Australia and New Zealand

COSBOA Council of Small Business Australia

CTA Corporate Tax Association

EDCA External debt collection agency

IGT Inspector-General of Taxation

IRS Internal Revenue Service

JCPA Joint Committee of Public Accounts

JCPAA Joint Committee of Public Accounts and Audit

List of recommendations

3 Review of evidence and Committee findings

Recommendation 1

To increase transparency, the Committee recommends that the Auditor-General, Commonwealth Ombudsman, and Inspector-General of Taxation examine ways to increase the profile of their co-ordination

activities—potentially through their websites, annual reports, and consultations undertaken for work programs.

Recommendation 2

To increase transparency, the Committee recommends that the Auditor-General, Commonwealth Ombudsman, and Inspector-General of Taxation improve the explanation in their reports of why each review

was conducted and how the review fits in with past and other current reviews.

Recommendation 3

The Committee recommends that the Australian Taxation Office and the Inspector-General of Taxation redouble their efforts to improve communication before, during and after reviews.

Recommendation 4

The Inspector-General of Taxation examine opportunities to conduct targeted reviews based on complaints and emerging issues in tax administration, and work with the Australian Taxation Office to develop a mutually efficient system for such reviews.

Recommendation 5

The Committee recommends that the Standing Committee on Tax and Revenue of the next Parliament consider expanding its biannual inquiries

xiv

into the Australian Taxation Office to include scrutiny of the Inspector-General of Taxation, or alternatively to conduct a separate dedicated regular inquiry into the annual report of the Inspector-General.

Executive summary

Inquiry background

The Australian Taxation Office (ATO) raised the issue of its external scrutiny with the Committee at a biannual hearing in February 2014. The ATO suggested that its external scrutiny may be excessive.

The Committee’s initial view in its March 2014 report was that scrutiny arrangements were appropriate. The ATO’s external scrutiny was much the same as other agencies. The main exception was the Inspector-General of Taxation, but other agencies with strong powers, in particular the security and intelligence agencies, also had their own Inspector-General. The Committee noted comments from the ATO’s Capability Review in 2013 that it is ‘fortunate’ to receive a great deal of external scrutiny.

On 1 February 2016, the Committee received draft terms of reference from the Treasurer, the Hon Scott Morrison MP. The Committee adopted the terms of reference and called for submissions shortly thereafter.

Scrutiny background

The ATO’s scrutineers for the purposes of this inquiry comprise the Australian National Audit Office (ANAO), the Inspector-General of Taxation, the Commonwealth Ombudsman, parliamentary committees, the courts and the Administrative Appeals Tribunal. Responsibility for complaints about tax administration was transferred from the Ombudsman to the Inspector-General in May 2015.

The scrutineers work very differently. Some make policy recommendations while others do not. Statutory scrutineers operate within the ATO with access to detailed data, while parliamentary committees work at a distance and rely more on public submissions and witness testimony.

xvi

The Committee also made some international comparisons of ATO scrutiny and found that much of what the ATO deals with in Australia is also present in comparable jurisdictions. For example, Auditors-General regularly scrutinise revenue agencies, public accounts committees follow-up these reports, there are external complaints mechanisms, and parliamentary committees conduct general oversight, as well as ad hoc inquiries.

There are also some differences. Only Australia and the United States have an Inspector-General. However, overall, the Committee concluded that the oversight of the ATO is similar to that of comparable jurisdictions.

The Committee noted some past reviews of the ATO. The Australia’s Future Tax System Review in 2009 mainly covered tax policy, but also discussed the ATO’s accountability. It noted that over time the ATO has become larger, better resourced, and taken on more functions. The Review recommended steps to improve the ATO’s governance, such as establishing an advisory board for the ATO, ensuring the scrutineers are properly resourced, and that parliamentary committees follow up scrutineer reports.

The Capability Review in 2013 was conducted under the auspices of the Australian Public Service Commission. It found that the ATO was in need of transformational change and that its pace of innovation was starting to slow. Overseas revenue agencies were beginning to overtake it, especially in electronic services. The ATO’s culture tended towards risk aversion and it needed to manage risk, rather than avoid it. The Commissioner’s reinvention program should be viewed in this context.

Evidence and findings

Duplication and overlap

In 2011, the Joint Committee of Public Accounts and Audit (JCPAA) held a hearing with scrutineers and the ATO. The meeting discussed the co-ordination of scrutineers’ work and that Committee recommended that they report back on this. The scrutineers provided a joint statement in 2012. They noted past examples of co-ordination and promised to meet collectively to further co-ordinate their work.

During the inquiry, some stakeholders suggested that there was overlap in reviews, or that external scrutiny was ‘haphazard’. The ATO gave several examples of overlap, including director-penalty notices, which it claimed had been reviewed seven times in five years.

xvii

The scrutineers rejected the claim of overlap. They stated that they held the co-ordination meetings and that they were effective. Some scrutiny reports have expressly addressed the issue of duplication and how reviews relate to each other.

The Committee notes that having reviews cover related topics does not necessarily indicate duplication. In the case of director penalty notices, four of the seven reports only mentioned the topic by way of background. Two covered it in some depth, albeit for different purposes. The seventh report made a policy recommendation to government and probably did not involve an information request of the ATO.

The Committee concluded that the extent of any duplication, if it does occur, is minimal. The Committee supports the ability of scrutineers to select the reviews they think are the most valuable, within their mandate. The Committee also concluded that their co-ordination process is sound.

However, the Committee did find opportunity for the scrutineers to improve the transparency of the co-ordination. The Committee recommended that the scrutineers improve the profile of their co-ordination activities and that they improve the explanation in their reports of why each review was conducted and how it fits in with other reviews.

Cost to government of scrutiny

The ATO argued during the inquiry that it diverted significant resources to respond to the work of scrutineers. It also noted that there is a drive across government to reduce red tape. However, the ATO did not provide detailed information about scrutiny costs.

Stakeholders pointed to the benefits of scrutiny. They argued that scrutiny promotes community confidence in the tax system and that it is a form of investment.

The Committee supports the view that external scrutiny is an investment in the tax system and that the benefits of the scrutiny accrue more widely than the ATO. The Parliament, Australian businesses and individuals also benefit. The costs of external scrutiny also need to be kept in perspective relative to the size of the ATO and its importance to the economy.

There is also scope for the ATO to manage its costs during a review. This includes how it engages with scrutineers. Further, the ATO can decline scrutineer recommendations if it believes that implementation would be costly, and has done so in the past.

xviii

Differential regulation

Differential regulation is the replacement term for ‘earned autonomy’. This concept is based on the provisions in the Public Governance, Performance and Accountability Act 2013 that allows the Finance Minister to apply the Act’s requirements differentially. The Act governs the management of public resources, performance reporting, financial reporting, and appropriations. The ATO argued that if it demonstrated good risk management and high standards of performance, then the idea of differential regulation could be extended to reduce its external scrutiny.

The Auditor-General made some important comments on this topic. He noted that the ANAO selects agencies for audit partly on the quality of their administration. Well-managed agencies have, on average, fewer audits. Further, the Auditor-General is an officer of the Parliament. Differential regulation refers more to how the Executive applies regulatory frameworks to its own entities. The Auditor-General also stated that scrutineers’ independence will be compromised if a third party can decide whether the ATO has earned less scrutiny. Finally, the size of the ATO means that scrutineers will always have an interest in its operations.

The Committee concluded that differential regulation is not applicable to the external scrutiny of the ATO. The Committee notes that scrutineers already take risk into account in determining review topics, which could be termed ‘differential scrutiny’.

Specific issues

Communication between the ATO and Inspector-General

Evidence during the inquiry indicated that both the ATO and the Inspector-General considered that communication during reviews could be improved.

The ATO stated that it was not aware how the Inspector-General selected topics for review and did not take on board its comments on draft reports. The Inspector-General commented that the ATO had considerable opportunities to discuss reviews as they progressed, but could do more to engage his office. Instead, the ATO might conduct its own parallel reviews, justify or contextualise the information it provides, and allocate significant resources to defending strongly-held views.

The Committee is concerned about the state of communication between the two parties. If there are substantial opportunities for communication, then perhaps the issue is its quality. If communication over the past few years had been better, this inquiry may not have been necessary. The Committee has recommended that the

xix

ATO and the Inspector-General redouble their efforts to improve communication before, during and after reviews.

The position and role of the Inspector-General of Taxation

A majority of submissions supported the position of the Inspector-General, often suggesting that his role be widened, either through greater resources or powers. A small number of submissions suggested that the position be abolished. The Commonwealth Ombudsman noted that an oversight body that covered a small number of agencies ran the risk of being either captured by them, or becoming antagonistic towards them.

The Committee is of the view that the office of Inspector-General should continue. This office has proven its worth through quality reviews that have improved the ATO’s operations and the position of taxpayers. It also has strong support among almost all stakeholders.

The Inspector-General has taken on a new role in handling complaints about tax administration. There is now the opportunity for the Inspector-General to conduct shorter, timelier reviews based on complaints data. Not only did some stakeholders suggest this, but both the ATO and Inspector-General did as well. The Committee has made a recommendation to this effect.

The Committee acknowledges that the structural issues raised by the Ombudsman must be managed. The Committee recommends either expanding its own biannual hearings with the ATO to include scrutinising the Inspector-General, or holding regular, separate inquiries to examine the Inspector-General’s performance.

The role of this Committee

The Committee has taken up the role of scrutinising tax administration since its creation in 2013, following previous work by the JCPAA. The Committee received feedback about its work from the ATO and stakeholders and appreciates the various suggestions made. The two comments in particular that the Committee will examine more closely in future are to follow up scrutineers’ reports on the ATO and to give stakeholders greater input to, and notification of, topics for regular ATO scrutiny hearings.

A board for the ATO

Some submissions recommended that a board be created for the ATO. The issue of a board is outside the Committee’s terms of reference, however it was raised by a number of stakeholders during the inquiry.

xx

Three types of board have been discussed over time for the ATO:

ï® an advisory board, that provides advice to senior management on

issues such as information technology, strategy and culture

ï® a management board, that takes management decisions, although in

revenue agencies it does not make decisions about individual taxpayers

ï® a policy board that provides advice to key parties on tax policy.

The Board of Taxation was created in 2000 and is a policy board. The Australia’s Future Tax System Review in 2009 recommended that an advisory board be created for the ATO. It did not support a management board because this would interfere with the clarity of responsibility between a statutory authority and its minister.

The key question from the perspective of the inquiry is how an internal mechanism, such as a board, affects external scrutiny. Internal controls and external scrutiny are complements, rather than substitutes. Therefore, establishing a board may have little effect on external scrutiny. The Committee is of the view that establishing a board for the ATO should not change current scrutiny arrangements.

ATO culture and reinvention

During the inquiry, the Committee received a number of complaints about the ATO. These included mediation during tax disputes, enforcement and debt collection, determining whether a taxpayer is an employee or contractor, allegations of fraud, and the cost to small business of ATO compliance activities.

The Committee covered these issues in its report on tax disputes in March 2015 and the ATO has agreed to implement or examine many of the Committee’s recommendations. Further, the Committee believes that the ATO is going through a process of genuine cultural change under the Commissioner’s reinvention program and acknowledges that significant cultural change can take years.

The Committee encourages continued action and looks forward to seeing the positive outcomes that cultural change will bring to the ATO, taxpayers and tax practitioners.

1

Background to the inquiry

The biannual hearing of February 2014

1.1 In February 2014 the Committee held a public hearing with the Australian Taxation Office (ATO) and its scrutineers in the course of its inquiry into the 2012-13 Annual Report of the ATO.

1.2 The ATO tabled a supplementary submission at the hearing. It comprised a chart of external governance arrangements.1 An updated version of the chart forms Appendix 1 to the ATO’s submission to the inquiry.2 The ATO made the point through use of the charts that it is subject to a wide range of external accountability mechanisms. These include:

ï® administrative and security requirements

ï® the regulatory financial and performance framework, including

corporate plans and annual report requirements

ï® parliamentary committees

ï® statutory scrutineers, including the Auditor-General and Inspector-General of Taxation.

1.3 In 2014, Mr Jordan argued that the ATO was subject to a great deal of external scrutiny:

We had 14 scrutineer reports last year: there were the six from the inspector-general, double-sided printing, and two of which are not

yet released. But there are six reports there. There are seven Australian National Audit Office reports on performance audits and those sort of things—I do not know how big they would be. There is the one ‘own motion’ from the ombudsman …3

1.4 However, he also stated at the hearing that ‘As an organisation we welcome oversight and input.’4

1.5 The Committee observed in 2014 that almost all agencies are subject to scrutiny by the Auditor-General and the Ombudsman, and they appear before Senate Estimates. It conceded that those scrutineers focused more attention on the ATO than some other agencies. This reflected the importance of the ATO’s role. The only extra layer of scrutiny was the Inspector-General of Taxation (IGT). However, this also reflected the ATO’s importance, just as the Inspector-General of Intelligence and Security reflected the importance of the intelligence and security agencies.

1.6 The Committee noted the view of the Australian Public Service Commission that the ATO was fortunate to have a high level of scrutiny. The Committee’s interpretation was this was an effective way of avoiding serious or extensive failures in performance.

1.7 The Committee concluded at that time that current arrangements were appropriate.5

1.8 The Committee’s next biannual hearing was in August 2014. The ATO did not raise the subject of scrutiny in its submission, but at the hearing Mr Jordan remarked that the ATO was currently responding to 10 separate reviews.6

1.9 The ATO did not further raise this issue with the Committee until the instigation of this inquiry.

1.10 On 1 February 2016, the Treasurer wrote to the Committee with terms of reference for an inquiry into the external scrutiny of the ATO. The Treasurer’s letter noted that a recent functional and efficiency review of the ATO identified the possibility of savings to government from streamlining the ATO scrutiny arrangements. It also referred to the possibility of duplication between reviews, and concluded that an inquiry into the underlying framework for the scrutiny of the ATO would be the most useful course. This informs the terms of reference.

1.11 The Committee adopted the inquiry on 3 February 2016.

1.12 This new inquiry is an opportunity to examine the matter afresh. On this occasion, the Committee has had the benefit of the views of stakeholders, including scrutineers, taxpayer representatives, and others with an interest in public administration.

1.13 The Committee notes its earlier comments on the appropriateness of current scrutiny arrangements, but is not bound by them.

1.14 Mr Jordan has welcomed the new inquiry. He suggested that the Committee could examine whether:

… the scrutiny [is] the most useful, purposeful and fit for purpose now, some years on from some of these scrutiny issues being put in place, or is it simply more red tape that really does not help necessarily position and improve the tax system and the ATO for the future …7

Inquiry overview

1.15 The inquiry was advertised by media release, social media and direct mail. The Committee sought submissions from relevant Australian Government ministers, legal, accounting, and tax representative bodies, tax practitioners, and think tanks.

1.16 The Committee received 30 submissions and three supplementary submissions. Three submissions were confidential. The submissions are listed at Appendix A.

1.17 The Committee held two public hearings in Canberra. Public hearing details are listed at Appendix B. The Committee received two exhibits, which are listed at Appendix C.

1.18 The report structure is as follows.

1.19 Chapter 2 covers the background to ATO scrutiny, including a profile of the scrutineers, the volume of reports, and international comparisons.

1.20 Chapter 3 reviews the evidence and makes recommendations on the three main points in the terms of reference, as well as other relevant topics raised during the inquiry on external scrutiny of the ATO. The two key issues in the inquiry were:

ï® the extent of any possible overlap in reviews by the Auditor-General

and the Inspector-General

ï® communication between the ATO and the Inspector-General.

2

Background to scrutiny of the ATO

2.1 This Chapter provides an overview of the ATO’s external scrutiny, as well as some perspective through international comparisons. After describing the function and background of each scrutiny body, a comparison of their recent scrutiny of the ATO is undertaken. The topics considered are:

ï® the scrutineers

ï® frequency and coverage of external scrutineer reports

ï® international comparison

ï® recent reviews of the ATO.

The scrutineers

2.2 The list of ATO scrutineers for the purposes of this inquiry include:

ï® the Australian National Audit Office (ANAO)

ï® the Inspector-General of Taxation

ï® the Commonwealth Ombudsman

ï® joint and House committees

ï® Senate Committees

ï® courts and the Administrative Appeals Tribunal

2.3 The role and operations of each of these scrutineers is outlined below.

Australian National Audit Office 2.4 The ANAO undertakes performance audits and financial statement audits of Commonwealth public sector bodies. This is a core function, and was established by the fourth Act to be passed by the Commonwealth

Parliament in 1901. The ANAO provides independent reports and advice for the Parliament, the Australian Government and the community. Its

6 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

overall aim is to improve Commonwealth public sector administration and accountability.1

2.5 The Auditor-General is an independent officer of the Parliament. Section 8 of The Auditor-General Act 1997 states that this officer has ‘complete discretion in the performance or exercise of his or her functions or powers’ and ‘is not subject to direction from anyone’ as to audit selection, the conduct of audits, and priorities.

2.6 The ANAO can set its own work program, but it outlines a consultative, risk based approach on its website:

The ANAO adopts a consultative approach to its forward audit program, which takes account of the priorities of the Parliament, as advised by the Joint Committee of Public Accounts and Audit, the views of entities and other stakeholders. The program aims to provide a broad coverage of areas of public administration and is underpinned by a risk-based methodology.2

2.7 The ANAO has extensive powers. For example, it can compel the provision of information and can gain access to classified government information.

2.8 The ANAO’s audits of the ATO’s financial statements are similar to those for other agencies. These are not considered in this inquiry because they have been specifically excluded in the inquiry’s terms of reference.

2.9 The ANAO’s performance audits look into the non-financial performance of government entities and programs. They assess whether administration has been carried out economically, efficiently, effectively, and in accordance with any requirements.3

2.10 Recently, the ANAO has begun inviting public submissions to some inquiries. For example, it has invited public contributions to its current review of myGov.

2.11 Staff of the ANAO come from varied backgrounds. Many have experience in program or financial management in the Australian Public Service. Those who audit financial statements tend to be qualified auditors.4

The Inspector-General of Taxation 2.12 The Inspector-General of Taxation was established in 2003 to review, and make recommendations to government on, systems established by the ATO to administer the tax laws, including systems for communicating

with the public or with particular people or organisations.5 Its original purpose was ‘to strengthen the advice the government received about tax administration and process … with a focus on improving the operation of the tax administration system’.6

2.13 Establishment of the Inspector-General followed complaints about the ATO’s administration of mass marketed investments schemes and the business activity statement, which was part of the New Tax System.7

2.14 There was a consultation process managed by the Board of Taxation, and widespread support from tax practitioner groups, before the legislation was introduced. The Board’s report recommended that the Inspector-General should represent the perspective of taxpayers.8

2.15 From 1 May 2015, the investigative powers of the Commonwealth Ombudsman in relation to individual tax matters were transferred to the Inspector-General. The rationale was:

Issues surrounding taxation laws can be complex and specialised. This complexity is compounded as the administration of the taxation laws is scrutinised by both the Inspector-General and the

Ombudsman. By concentrating expertise about taxation administration issues, taxpayers are provided with a dedicated body to investigate and handle complaints about all taxation matters.9

2.16 In deciding on its work program, the Inspector-General has a great deal of independence. He can be directed to conduct a review by the Minister (that is, the Treasurer or Assistant Treasurer), but although he may be requested to conduct a review by the Parliament, the Tax Practitioners

Board or the Commissioner of Taxation he does not have to comply with that request. An earlier requirement to consult with the ANAO and the Ombudsman has recently been removed.10

2.17 In practice, to determine which reviews will best reflect community concern and generate the greatest improvements to tax administration, he continues to confer with the ANAO and also confers with tax practitioners through their industry associations; this Committee; the government; the Treasury and the ATO.11

2.18 The Inspector-General has considerable powers in requesting information, including the power to require tax officials to give evidence under oath or affirmation. There are criminal penalties including imprisonment for tax officials who do not provide documents he requests.12

2.19 The staff of the Inspector-General are tax specialists with qualifications in law and/or accounting, often with experience in tax administration or tax practice.

The Commonwealth Ombudsman 2.20 While the Ombudsman’s role in handling complaints about tax administration has been transferred to the Inspector-General, the Ombudsman still has a role in examining complaints about the ATO in

relation to public interest disclosure and freedom of information. The Office can also examine complaints about the Inspector-General.

2.21 The Ombudsman has wide ranging coercive powers. He or she can, for example, obtain a file or policy documents from an agency or interview an individual under oath. He or she can override secrecy provisions in other legislation, the privilege against self-incrimination and official use of legal professional privilege.13

Joint and House committees 2.22 The Joint Committee of Public Accounts and Audit (JCPAA) played an important role in tax administration. Its precursor, the Joint Committee of Public Accounts (JCPA), conducted the first major review of the self-

assessment system in 1993 with its report An Assessment of Tax, which had 148 recommendations. The JCPAA conducted another extensive review in 2008, during which it commenced biannual hearings with the ATO.14

2.23 The JCPAA continued the hearings into tax administration, on an annual or biannual basis, until 2013. This role has been taken over by the House Standing Committee on Tax and Revenue, this Committee. Its pattern has been to hold biannual hearings into the ATO’s annual report, and to conduct inquiries referred to it by the Treasurer.

2.24 Parliamentary committees comprise government and non-government members. They have the power to require people to appear before them and to produce documents. They investigate, among other things, questions of government administration and service delivery. The JCPAA can self-refer inquiries, but House of Representatives standing committees can only examine policy issues by referral from the House or a Minister. House committees can inquire into the annual reports of agencies and ANAO reports into agencies which have been referred to them by the Speaker.15

2.25 Staff of parliamentary committees tend to be policy generalists. Committee reports are usually not technical, but are often informed by the views of experts.

2.26 The JCPAA consists of Members and Senators and is established by the Public Accounts and Audit Committee Act 1951. The purpose of the JCPAA is essentially to hold Commonwealth agencies to account for the lawfulness, efficiency and effectiveness with which they use public monies.16 The JCPAA regularly examines ANAO reports and holds agencies to account for implementing ANAO recommendations. House committees occasionally do this too.

The role of committees is to investigate and to draw attention to what they find. They throw ‘light in dark corners’ and give advice. … The Senate may refer a particular matter to a committee because the matter warrants detailed examination, because the Senate wants information to be collected, or because it wants to hear views on the matter. These tasks are more easily undertaken by a small group of senators rather than by the Senate as a whole.

2.28 There are paired legislation and references committees for each of eight subject areas. In particular, the Senate Economics Committee has general oversight of Treasury and tax matters. The Senate has also created select committees to review tax issues. The Select Committee on a New Tax System reported in 1999 and the Select Committee on Scrutiny of New Taxes issued its reports in 2011. Both of these committees focussed on tax policy, rather than administration.

2.29 An important duty of the legislation committees is the scrutiny of proposed government expenditure in Estimates hearings:

Public hearings are held at which the relevant Senate ministers, together with senior officials from the organisations whose estimates are being examined, appear before the committees to explain expenditure proposals and to answer questions concerning the effectiveness and efficiency of various programs. An observer from the Department of Finance and Deregulation also attends each committee hearing.

2.30 Legislation committees also inquire into any bills referred to them, and into the annual reports of agencies for which they are responsible. These inquiries often include submissions from the public and public hearings

2.31 Senate references committees inquire into various matters referred to them by the Senate. The scope of inquiries and their terms of reference may range from the very broad and comprehensive to the specific. Examination can require evaluation of policy areas and assessment of implementation within and across allocated portfolios.

17 The material in this section is taken from Senate Brief No. 4, ‘Senate Committees’, viewed 9 April 2016.

BACKGROUND TO SCRUTINY OF THE ATO 11

Courts and the Administrative Appeals Tribunal 2.32 Although they are not a focus of the inquiry, taxpayers can hold the ATO to account by appealing a decision of the ATO to the courts or the Tribunal (AAT). In the first instance, the ATO is scrutinised in the sense of

whether it wins or loses a case. Scrutiny can be extended if the court comments on the ATO’s conduct. The Institute of Public Affairs provided the Committee with examples of where the judiciary has adversely commented on how the ATO has managed litigation:

Governance at the ATO is so poor that it felt quite unconstrained by the courts. In the case, Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd, at least two Federal judges were highly critical of the ATO’s conduct …

As Justice Richard Edmonds has subsequently noted, ‘… a proposition such that the Commissioner [of Taxation] does not have to obey the law as declared by the courts until he gets a decision that he likes was astonishing …’18

2.33 The Committee has previously noted positive judicial comments about the ATO in its inquiry into tax disputes.19

2.34 The ATO can also use the courts to hold taxpayers to account through enforcement action such as garnishee orders, departure prohibition orders, and company wind-ups.

2.35 Greenwoods noted that the courts and AAT provide a specialised form of scrutiny. Although not commonly used, it can set important precedents for how the ATO operates:

Of course, these bodies are not the means for comprehensive or systematic oversight of the ATO but they do constrain its activities both in the (few) matters which are litigated but more importantly in the way that precedent sets standards for the ATO’s future behaviour and administrative actions.20

2.36 An obvious barrier to taxpayers being able to approach the courts or AAT is cost. Ernst & Young advised that taxpayers can self-represent at the AAT. Ernst & Young also noted that it is difficult to prove maladministration in court.21

2.37 An advantage of the courts and the AAT is that they are independent of the government of the day and the parties in a dispute.

Summary 2.38 A profile of ATO scrutineers is summarised in Table 2.1.

2.39 What is apparent from the table is how different the external scrutineers are. These include:

ï® some make policy recommendations, while others do not

ï® the statutory scrutineers operate within the ATO, with access to

detailed data, while parliamentary committees work at a distance and rely more on public submissions and witness testimony

ï® different interests are represented, including the Parliament, taxpayers,

the House and the Senate

ï® expertise varies across audit, tax, mediation, and general public policy

and administration.

2.40 Perhaps the best utilisation of this expertise is when the scrutineers cooperate. This occurs when parliamentary committees follow-up scrutineer reports, such as the JCPAA’s work with ANAO reports. This was further covered in the Review of Australia’s Future Tax System (AFTS), discussed below.

Frequency and coverage of external scrutineer reports

2.41 Appendix D includes a list of external scrutineer reports from 2010 to 2015, and also shows current or completed inquiries in 2016.

2.42 The heaviest volume of scrutiny comes from the ANAO and the Inspector-General of Taxation, who average approximately five and four reports a year respectively. The ANAO has the widest range of topics of the scrutineers. Its reports are not limited to tax administration but also cover the ATO’s corporate operations and issues that do not directly affect taxpayers. Examples are the 2011 report on ATO shopfronts, the 2013 report on the ATO’s property portfolio, and the current audit on meeting revenue targets in budget measures. The Inspector-General’s reports focus on interactions between taxpayers and the ATO.

Make findings of facts. Interpret the law. Passive. Cases brought by the parties.

Passive. Information brought by the parties. No

Source Auditor-General Act 1997; Inspector-General of Taxation Act 2003; Ombudsman Act 1976; Public Accounts and Audit Committee Act 1951: House of Representatives, Standing Orders as at 26 March 2015; Senate, Standing Orders as at August 2015.

14 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

2.43 The volume of Ombudsman’s reports is much lower. The Ombudsman issued two reports specifically in relation to the ATO in 2010 and then covered the ATO in the general report on complaints management across government in 2014. From 2014, the Ombudsman also published a short document summarising tax complaints, but this could not be considered detailed scrutiny in the same sense as the 2010 reports.

2.44 The JCPAA and the House Tax Committee have conducted annual or biannual hearings with the ATO, along with occasional inquiries into specific matters. These specific inquiries have become more frequent with the creation of this Committee in 2013. The Senate Economics Committee has also scrutinised the ATO.

International comparisons

2.45 In its submission, the Law Council of Australia provided a comparative analysis of the oversight arrangements of revenue agencies in Australia, the United Kingdom, Canada and New Zealand. The Committee has supplemented the Law Council’s information with information on the United States, and some material on public accounts committees. The material is presented in Table 2.2.

2.46 The five countries have broadly similar scrutiny arrangements, but with notable differences. The US Treasury Inspector General of Tax Administration has a similar oversight role to the Australian Inspector-General. However, he issued 92 audit reports in the year to September 2015, a much higher number than his Australian counterpart. The US office differs from the Australian one in that it also investigates tax crime and oversees the administration of the Internal Revenue Service (IRS) in some detail. On the other hand, it does not investigate individual complaints.

2.47 All countries have an Auditor-General (in the US, the Government Accountability Office). The Canadian Auditor-General publishes approximately 15 performance audits annually, compared with 50 for the ANAO, so the proportion of reports about the tax agencies in the two jurisdictions are similar. The US Government Accountability Office put out 17 reports specifically about the Internal Revenue Service (as well as a few reports about broader administrative matters that involved the IRS) in the year to September 2015. This was a much smaller proportion of its whole report tally than for Australia and Canada. The UK National Audit Office also has to cover issues that the States and Territories would cover in Australia, so it is less directly comparable.

BACKGROUND TO SCRUTINY OF THE ATO 15

Table 2.2 Comparative analysis of oversight of the revenue agencies in Australia, the United Kingdom, Canada, New Zealand and the United States

Source Adapted from Law Council of Australia, Submission 9, Appendix 1 and websites of public accounts committees. The Canadian Public Accounts Committee holds hearings and publishes agency action plans in relation to Auditor-General reports, but does not issue reports for its own inquiries.

16 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

2.48 All of the countries have a complaints agency for taxpayers. The US Taxpayer Advocate Service is an independent body located within the IRS; it also reports separately to the House oversight and Government Reform Committee, largely about systemic issues in the IRS.

2.49 Parliamentary scrutiny is strongest in the UK, where the Public Accounts Committee is active; and in the US, where there are very active Senate and House Committees: a Senate Finance Committee inquiry into the IRS’s processing of applications for tax-exempt status by ‘political advocacy’ organisations took two years and produced a report in four volumes, totalling approximately 5000 pages, in August 2015; and the House Committee on Ways and Means has published six statements critical of the IRS so far this year. Annual report inquiries mainly occur in Australia, the UK and the US.

2.50 All countries have a public agency or process to conduct research on tax/fiscal policy. Finally, the revenue agencies in the US, UK and Canada have a management board. This is not external scrutiny in the sense of an independent statutory agency, but does form part of the accountability framework. The IRS Oversight Board in the US currently does not have a quorum.

2.51 In summary, the oversight of the ATO seems similar to that of comparable jurisdictions.

Recent reviews of the ATO

The AFTS Review 2.52 The Review into Australia’s Future Tax System (AFTS) focussed on tax policy, rather than administration. However, it did make some comment relevant to this inquiry.

2.53 In relation to the general performance of the ATO, the Review noted ATO data that 86 per cent of individuals and 90 per cent of businesses considered that the ATO was doing a good job. The Review also noted the 2008 report of the JCPAA on tax administration, which commented that the ATO was regarded internationally as a leading tax authority.22

2.54 On tax administration, the Review concentrated on the role and accountability of the ATO. The Review found that, over time, the ATO has become larger, better resourced, and taken on more functions. However,

the statutory independence of the Commissioner had meant that the ATO was subject to less oversight by a minister and, therefore, less parliamentary scrutiny.23

2.55 A number of accountability institutions had been built up to address this problem. These included the ANAO, the Ombudsman, the Inspector-General of Taxation, Senate committees and the JCPAA. The Review came to the conclusion that the complexity of the tax system made it difficult for parliamentarians to oversee the ATO. Of note for this inquiry was the Review’s concern about possible overlap between the Ombudsman and Inspector-General. This was because both officials interacted with taxpayers and responded to taxpayer concerns, although in different ways.

2.56 The review made four recommendations to improve the accountability mechanisms of the ATO:

ï® an advisory board be established for the ATO

ï® the role of the Inspector-General should be clarified so that it focusses

on tax administration issues for business

ï® the government should ensure that the external scrutineers are properly

resourced, ie the ANAO, the Ombudsman and the Inspector-General

ï® the JCPAA should follow-up implementation of the reports of the

Ombudsman and the Inspector-General.

The Capability Review 2.57 In 2010, the Department of Prime Minister and Cabinet released Ahead of the Game: Blueprint for the Reform of Australian Government Administration. It recommended that the Australian Public Service Commission (APSC)

assess the capability in key agencies. The aim was to raise the capability of key agencies, as well as the public service overall.24 The agencies scheduled for review were all the departments of state, as well as three others: the ATO, the Australian Bureau of Statistics, and the Australian Customs and Border Protection Service.

2.58 The leaders for each review comprised three people with extensive public and private sector experience; two were external to the public service and one a serving high-level SES officer seconded from another agency.

23 The remainder of this discussion is from AFTS, Report to the Treasurer, Part Two, Detailed Analysis, volume 2 of 2, December 2009, pp. 660-64. 24 APSC, Capability Review: Australian Taxation Office, May 2013, p. v.

18 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

2.59 Fieldwork for the ATO’s review was conducted between January and May 2013. The Commission finalised the report in May 2013 and the Government released it in December 2013.

2.60 The ATO’s capability review found that the agency had a strong track record in implementing new tax law and managing the tax and superannuation systems. It also found that the ATO had historically been a world leader in tax administration with many innovations. However, its pace of innovation had started to slow and tax administrations in other countries were overtaking it, especially in electronic services.25

2.61 The ATO was in need of transformational change.26 The review summarised its culture as follows:

The prevailing culture in the ATO is one of collaboration, professionalism, technical accuracy and integrity of process. When taken to the extreme, this culture results in what review participants almost universally described as risk aversion. A cultural predisposition to avoid rather than appropriately manage risk manifests as:

ï® elevation of decision making

ï® protracted processes of internal consultation and debate that

delay outcomes ï® a feeling of disempowerment at all levels

ï® perceived lack of support for staff if a mistake is made.27

2.62 The APSC identified five key priority areas for the ATO to address:

ï® developing a forward-looking, enterprise-wide strategy

ï® developing better IT efficiency and agility and doing more

discretionary work that could support innovations to simplify the system for taxpayers

ï® implementing cultural change to ensure that staff at the front line

understood the mission and purpose of the organisation and reducing the emphasis on technical capability in favour of softer skills

ï® simplifying internal governance, ensuring that guidance is practical and

2.63 In relation to the ATO’s internal governance, the Commission stated that the ATO was ‘in the fortunate position of receiving extensive external scrutiny’.29

2.64 Following the reviews, agencies developed and implemented action plans and the Commission announced its intention to conduct a smaller follow-up review (a health check) to identify what improvements had occurred. The ATO informed the Committee of its progress in addressing the priority areas at the biannual hearings and published a series of implementation updates, with the final update in April 2015. The ATO stated that it ‘had made considerable progress against each of those [five priority] areas’30 However, there is no publicly available information in relation to its health check.

3.1 The issue of co-ordinating scrutiny of the Australian Taxation Office (ATO) has been raised before in committee proceedings. In November 2011, the Joint Committee of Public Accounts and Audit (JCPAA) finalised the report for its Ninth biannual hearing with the Commissioner of Taxation. One of the main themes of the hearing and report was external scrutiny and review. The Committee noted the importance of the scrutiny bodies, which comprised at that time the Auditor-General, the Inspector-General of Taxation, and the Commonwealth Ombudsman.1

3.2 At the hearing, the Acting Ombudsman raised the issue of coordinating ATO scrutiny, stating, ‘with the plethora of players in the oversight space or the integrity agency space, there was some confusion and a need for greater clarity.’2

3.3 The understanding of the JCPAA was that the scrutineers did communicate their work programs to each other, ‘but only to a limited extent.’ The Committee suggested that the scrutineers further analyse how

they could better plan and improve information sharing.3 The JCPAA recommended:

… that the external review agencies investigate and report on opportunities for more strategic planning and improved information sharing as they undertake their reviews to avoid duplication of their efforts and the Australian Taxation Office’s resources.4

3.4 The scrutiny agencies provided a joint response to the recommendation. They stated that they had not identified ‘any specific issues of duplicated review activity’. They also noted examples of their coordination, such as between the ANAO and Inspector-General in relation to their reviews of the ATO’s management of small to medium enterprises. Another example was coordination between the Inspector-General and the Ombudsman in relation to the former’s review of the ATO’s Change Program. 5

3.5 The scrutineers promised to ‘meet collectively as part of their annual planning processes to share information and consider more broadly the overall ATO review activity.’6 The joint response from the scrutiny agencies is included as Appendix E.

3.6 Despite this arrangement, the ATO claimed during the current inquiry that it was subject to duplication and overlap in scrutineer reports. The ATO’s submission included a number of case studies, one of which is laid out in Table 3.1.

3.7 The ATO expressed concern that the reviews often focussed on single topics, leading to a fragmented approach, and that there was insufficient time to bed down improvements:

The reviews have tended to focus only on single aspects of dispute resolution … This leads to a fractured approach to review and recommendations that do not consider the impact across the whole dispute resolution system, for both taxpayers and the ATO. The rapid succession of reviews (and often follow up reviews) on the

Joint Committee of Public Accounts and Audit, Report 426, Ninth biannual hearing with the Commissioner of Taxation, May 2012, p. 2. 6 Auditor-General, Acting Ombudsman, and Inspector-General of Taxation, Executive Minute on Joint Committee of Public Accounts and Audit, Report 426, Ninth biannual hearing with the

Commissioner of Taxation, May 2012, p. 1.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 23

same subject matter (eg objections, settlement) often means there is little time for any recommendations or improvements to be bedded down. Different scrutineers are also approaching their topic from different perspectives resulting in recommendations not always being well aligned.7

3.8 The Committee received a number of submissions whereby stakeholders suggested that there was overlap in the reviews.8 Greenwoods stated that, ‘there are indications that the external scrutiny is somewhat haphazard, spasmodic and misdirected in places’.9 Chartered Accountants noted that the high volume of reviews meant that it occasionally had trouble in securing resources to contribute to an ATO review, or at least to the extent that it would have liked.10

Analysis

3.9 During the inquiry, the scrutineers made two main points on this topic. Firstly, they stated that they held co-ordination meetings in line with their 2012 commitment to the JCPAA, which did result in changes to their work programs.11 The Auditor-General stated:

… I reiterate the point that we and the inspector-general consult on our relevant programs. We have both formal and informal processes for doing it. There is an annual meeting between us to talk about it, and similarly, when we are developing our annual

program, we meet with the inspector-general’s office, talk through the program and look at whether there are similar areas of coverage. That results quite regularly in changing the program to make sure that we are not doing the same thing. That happens formally when developing a program and also at the stage where we are putting together a scoping paper on what a particular audit will look like. We will go and talk through that to make sure, when you get into the detail, that everyone is aware of what is going on.

With respect to the building of our program, we develop a draft program. We give that to the JCPAA to consult with the parliament on the content of that program. It is also provided to all of the entities involved, including the ATO. We take their feedback on the program in developing it up.12

3.10 Consistent with this, the Inspector-General gave the example of Project Wickenby. The Inspector-General received a great deal of taxpayer feedback on this issue, but declined to investigate because it also involved agencies such as the Crime Commission and the Australian Federal Police. Both the ANAO and Commonwealth Ombudsman conducted reviews into it because their remit was across government and the Inspector-General’s powers did not extend beyond the ATO.13

3.11 The Committee notes that some scrutineer reports have discussed how they co-ordinated with their colleagues. In 2011 both the ANAO and the Inspector-General completed reports into compliance for small and medium enterprises. Both reports cross-referenced each other and explained how they sub-divided the topic to avoid overlap.14

3.12 The second point that the scrutineers made was that conducting reviews on related topics did not automatically indicate duplication. This could be because some reports might only touch on a topic by way of necessity or context. Therefore, in relation to the ATO’s list of seven reports that covered director penalty notices, the Inspector General responded that:

medium enterprises with annual turnovers between $100 million and $250 million and high wealth individuals, December 2011, pp. 51, 66.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 25

ï® the ANAO and Inspector-General’s reports of 2015 examined director

penalty notices in some depth (albeit for different purposes15)

ï® the Inspector-General’s report of 2010 only made a policy

recommendation to government and probably did not involve an information request from the ATO

ï® the remaining four reports only mentioned director penalty notices in

passing or by way of context.16

3.13 The scrutineers also pointed out that they conduct their reviews from different perspectives. Therefore, reviews on similar headline topics can be substantially different in substance. In evidence, the ANAO commented that the Inspector-General’s reviews were more from the taxpayers’ perspective, whereas ANAO reviews focussed on risk, IT, and controls.17 However, the ATO disputed this and argued that ANAO and Inspector-General reviews were similar, stating, ‘They cover very much the same types of things in the same types of ways.’18

3.14 The Committee notes these comments. It is apparent that, if co-ordination and recognition of others’ work is effective, then there will be minimal unnecessary duplication or overlap, and where it does occur the reasons will be clear. To investigate the effectiveness of co-ordination, the Committee examined three related reviews on tax debt, which was another example of overlap raised by the ATO.19 The case study is on the next page. It shows that scrutineer reports generally demonstrate how their reports relate to each other, although not always.

Between 2012 and 2015, ATO scrutineers released three reports into tax debt. Firstly, the ANAO released a report in June 2012 on how the ATO managed its use of external debt collection agencies (EDCAs). The ANAO then released a report on debt relief 12 months later. In the second report, the ANAO noted its previous reports on tax debt up to 2007, and then the 2012 report. The ANAO stated that debt relief had not been covered extensively in these previous reports.20

The 2013 ANAO report included: ATO engagement with debtors and guidance for its debt staff; assessing debt relief applications including the quality of decisions to remit interest; measuring the extent to which its debt relief strategies help taxpayers recover financially and meet their tax obligations; automated debt relief processes; and reporting of debt relief.

In July 2015, the Inspector-General of Taxation finalised a review into debt collection. The report had a chapter on external debt collection agencies and discussed the 2012 ANAO report. The Inspector-General’s report also discussed debt payment assistance, which is a similar concept to debt relief. The Inspector-General’s report did not discuss the 2013 ANAO report for this topic.21

- the 2013 ANAO report explained that it covered different ground than the 2012 ANAO report

- the Inspector-General’s 2015 report referenced and took into account the 2012 ANAO report. This included deferring the examination of the security of taxpayer information held by EDCAs due to its recent review

- the Inspector-General’s 2015 report did not mention the 2013 ANAO report, leaving the issue of co-ordination unresolved.

3.15 What struck the Committee during the inquiry is how far apart the ATO and scrutineers are on some of the issues. The question of duplication is one of them. The scrutineers believe they communicate effectively to minimise unnecessary duplication, yet the ATO and some stakeholders stated that it nonetheless occurs in some instances.

3.16 Overall, the Committee is of the view that the ATO has overstated the extent of duplication and that the extent of any duplication if it does occur is minimal.

3.17 To take an example, the ATO argued that seven reports examined director penalty notices, when four of the reports discussed the topic only as background. Such background context is necessary within scrutineer reports and is unlikely to have imposed significant burden upon the ATO in its development.

3.18 The Committee strongly supports the principle of discretion for scrutineers to select the reviews they think are the most valuable, within the confines of their legislation. Indeed, strong levels of independence are provided in their respective Acts and these are all necessary and appropriate to allow the scrutineers to perform the tasks expected of them by Parliament and government.

3.19 The Committee has also investigated the methods used by the scrutineers to discuss and develop their annual work plans and manage ad hoc issues, concluding that this process is sound. The process involves appropriate levels of consultation between the scrutineers themselves as well as extensive opportunities for consultation with the ATO.

3.20 The Committee therefore does not see the need for reform of the scrutineer’s mandates or processes on the basis of perceived duplication.

3.21 However, there is potential for minor improvements to the transparency of the coordination process between scrutineers and to public explanations of the context and rationale for each review.

3.22 The Committee notes that the public information available about the co-ordination meetings is limited. The meetings are briefly mentioned in the Inspector-General’s annual report, but not in the annual reports of the other two scrutineers. They are not specifically mentioned in the materials the scrutineers publish about their forward work programs, although they refer to consultations generally. The committee notes that there has been some examples of public coordination statements for standalone issues, such as in 2011 when the Inspector-General announced that he would not

28 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

investigate Project Wickenby because the ANAO and Ombudsman had a wider coverage of agencies.22

3.23 Without being prescriptive about how this might occur, the Committee suggests that the scrutineers consider ways of increasing the transparency of their co-ordination meetings and the fact that they work to avoid duplication in ATO scrutiny.

Recommendation 1

3.24 To increase transparency, the Committee recommends that the Auditor-General, Commonwealth Ombudsman, and Inspector-General of Taxation examine ways to increase the profile of their co-ordination activities—potentially through their websites, annual reports, and consultations undertaken for work programs.

3.25 Consistent with this recommendation, the Committee also sees scope for the scrutineers to improve the way that they set the context for inquiries in their reports. The Committee notes that this is often done; however there is scope to ensure this is done for all reports and to provide additional explanation. It is also important that the scrutineers do this when they might believe that the lack of overlap is apparent, to avoid misunderstandings that may stem from a less intimate knowledge of the reports contents.

3.26 The Committee raised this issue with the scrutineers and the Auditor-General referred to a recent JCPAA report, which covered the topic of how reports explain the audit scope and approach. The Auditor-General stated that he would be prepared to look at what the ANAO could do to put its work into better context.23

3.27 The Committee thanks the Auditor-General for his readiness to consider this matter and makes the following recommendation to all scrutineers.

3.28 To increase transparency, the Committee recommends that the Auditor-General, Commonwealth Ombudsman, and Inspector-General of Taxation improve the explanation in their reports of why each review was conducted and how the review fits in with past and other current reviews.

Cost to government of scrutiny

Background

3.29 In its submission, the ATO argued that it was required to divert significant resources to respond to the work of scrutineers:

The value to the community and return (or lack thereof) on investment in scrutiny is important and warrants the Committee’s examination. The direct, indirect and foregone costs of scrutiny need to be weighed up. Regardless of the relative merits of reviews, significant ATO resources are being drawn away from other work and priorities and invested in the scrutiny process, all in a time of diminishing resources.24

3.30 The ATO also noted that there is a current drive across government to reduce red tape and inefficiency. In support of this, the ATO cited the National Commission of Audit in 2014 and Barbara Belcher’s Independent Review of Whole-of-Government Internal Regulation in 2015.25

3.31 Chartered Accountants put a related view, namely that a large degree of public scrutiny could suggest an agency in crisis, when this was not the case.26

3.32 In 2013, a Capability Review of the ATO was conducted under the auspices of the Australian Public Service Commission. It argued that the ATO was ‘fortunate’ to be subject to considerable external scrutiny.27 The Committee’s interpretation is that it helps prevent emerging issues from becoming disruptive.

3.33 It would appear to the Committee that examining the costs of scrutiny makes the most sense if its benefits are also considered. This argument was also made by the Inspector-General.28 Some stakeholders saw benefits in scrutiny through supporting community confidence in the tax system or as a form of investment.29

3.34 In evidence, the Inspector-General commented that external scrutiny also had benefits in terms of voluntary compliance. If confidence in the tax system drops, then levels of voluntary compliance may also fall, increasing ATO costs as it seeks to secure higher rates of involuntary compliance.30

3.35 The Office of the Inspector-General of Taxation further noted that effective external scrutiny of the ATO provides comfort to overseas investors. In effect, it is part of their risk management:

I also think that businesspeople often look at perceptions from their own local perspective. For example, if I am a US investor coming into what I think is really a First World country I am expecting similar sorts of checks and balances to those I am used to having at home. In the States they have a very complex system of scrutiny that has evolved over some period. We have some parallels with that, and they take comfort from that when they see that as external investors coming in.31

3.36 Assessing the costs and benefits of external scrutiny can be difficult because there is no clear counterfactual. Greenwoods noted that, ideally, the costs of external scrutiny should appear to be wasted as hopefully no strong findings are made:

And it is more than a little ironic that, in this area, the investment in promoting external scrutiny should ideally appear to be ‘wasted’ - the preferred outcome is obviously that the external scrutiny will reveal that nothing untoward is happening. In the absence of a ‘smoking gun,’ it is easy to be misled into thinking that the sunk investment in establishing mechanisms for external scrutiny was excessive and has simply added to the deadweight cost of the system, but that would be a short-sighted view. There is

a fine judgment to make to determine just how much money should be invested in order to be confident that nothing significant remains to be discovered.32

3.37 Finally, the Committee received evidence that the ATO could itself improve how efficiently it engaged during reviews. The Inspector-General claimed that the ATO engaged in the following practices:

ï® a large number of staff attending meetings and discussions, of which

only a small number participate

ï® a lack of engagement with the Inspector-General in relation to requests,

resulting in excessive internal ATO processes to resolve issues

ï® the ATO undertaking its own internal reviews in parallel with the

Inspector-General reviews

ï® the ATO justifying or contextualising the information it provides, when

3.38 The Committee believes that agencies should operate as efficiently as possible and the cost of scrutiny is an important issue. However, costs cannot be considered separately to benefits. Although the ATO’s submission discussed costs, the Committee would have preferred it if the ATO provided some information that would support a cost/benefit judgement to be made. The ATO’s submission unfortunately did not provide any substantive recognition of the benefits of scrutiny, whether to the broader tax system or to ATO processes. Furthermore, it did not provide substantive evidence on what the internal costs of scrutiny actually are.

3.39 The Committee is of the view that the cost of external scrutiny provides a good return on investment for Australia. This return flows directly to the ATO, and indirectly to Government, the Parliament, and Australian businesses and individuals. It also flows to foreign investors through increased confidence in Australian tax system administration. Scrutiny is an investment in the tax system, not a cost.

3.40 The Committee also comments that the costs of scrutiny need to be kept in perspective relative to the size of the ATO and its importance to the economy. The Australia’s Future Tax System (AFTS) review noted that the resources available to the Inspector-General and the Ombudsman were ‘not substantial’,34 and this situation has not changed.

3.41 The Inspector-General has commented that the ATO could take some action to reduce its inquiry costs. The Committee also notes that the ATO can decline to implement some recommendations due to cost, and has occasionally done so in the past, or at least stated that implementation will depend on funding.35 Finally, the Committee believes some of the issues around cost may be related to communication during reviews. This topic is covered later in the report.

Differential regulation (earned autonomy)

Background

3.42 The concept of differential regulation (previously referred to as earned autonomy) arose in the Commonwealth context during the Commonwealth Financial Accountability Review. The position paper produced by the then Department of Finance and Deregulation (Finance) in 2012 noted that the accountability framework at the time used a one-size-fits-all approach in placing obligations on agencies. It recommended a more proportionate system based on an agencies’ risk. The document sought to ‘improve accountability and performance through managing risk not through increasing control’.36

3.43 Financial management in agencies is now governed by the Public Governance, Performance and Accountability Act 2013. In its current guidance on differential regulation, Finance notes that the Act allows the Finance Minister to apply some of Act’s requirements differentially. Further, entity heads have greater autonomy and are required to take into account entity risk in establishing their internal controls.37 The Act governs the use and

34 AFTS, Report to the Treasurer, Part Two, Detailed Analysis, volume 2 of 2, December 2009, p. 663. 35 IGT, Review into the Australian Taxation Office’s administration of penalties, February 2014, p. 60; IGT, Review into improving the self-assessment system, August 2012, p. 86. 36 Department of Finance and Deregulation, Sharpening the Focus: A Framework for Improving

ï® how the government prefers to receive information and its views on

transforming the public service

ï® appropriate levels of accountability to stakeholders such as Ministers,

the Parliament and the public.38

3.45 In its submission, the ATO acknowledged that differential regulation was not directly relevant to an agency’s external scrutiny. However, it suggested that the concept could be extended to the scrutineers and that they could take into account the ATO’s risk management and performance:

Whilst the benefits of an earned autonomy/differential approach, in terms of application to the Commonwealth Resource Management Framework, are yet to be realised, there could be an opportunity to extend this concept to the level of inquiry by our external scrutineers.

This would mean in areas that the ATO consistently demonstrates good risk management and high standards of performance, our level of scrutiny could be adjusted accordingly so that reviews could be redirected to higher risk areas and away from lower risks. This would mean that reviews are proportionate to risk and performance and more streamlined (and reduced).

The ATO could rely on the mechanisms we already have, to effectively monitor and assess our risks and performance and

drive activity into areas that are worth investigating by our external scrutineers.39

3.46 The SMSF Association and COSBOA took a similar view, arguing that the ATO was subject to excessive scrutiny and that it should be streamlined.40

3.47 Some information is available about the ATO’s internal governance. The 2013 Capability Review acknowledged that the ATO had invested heavily in its governance framework. However, processes needed to be streamlined. Internal committees were often ineffective because they did not have authority to make decisions. Internal guidance was ‘elaborate and formulaic’, rather than useful. The governance mechanisms, such as risk management, planning, performance measurement and reporting were yet to be fully integrated.41

3.48 In April 2015, the ATO published its final implementation update on the Capability Review. The reported actions are consistent with the Review’s recommendations and were co-designed with the Australia and New Zealand School of Government Institute for Governance.42

3.49 However, the Committee is not aware of any external, independent review of the ATO’s governance since 2013. In its submission the ANAO stated that its performance audit reports indicated there was scope for the ATO to become more performance oriented:

These reports have found that the ATO has relatively sound administrative processes, although with an emphasis on risk-based compliance arrangements rather than a performance-based approach focused on outcomes as well as outputs.43

3.50 The ANAO also stated that they apply concepts similar to differential regulation— a risk based approach—in selecting audit topics. Agencies that have demonstrated sound administration in previous years will generally have fewer performance audits.44

3.51 In evidence, the Auditor-General made a number of criticisms of extending the principle of differential regulation to how the scrutineers examine the ATO:

ï® the ANAO, in particular, is an officer of the Parliament, whereas

differential regulation refers more to ‘the extent to which executive government puts different regulatory frameworks on its entities’

ï® scrutineers’ independence will be compromised if a third party is

deciding whether the ATO has earned some autonomy

ï® the size of the ATO means that scrutineers will always have an interest

in its operations.45

3.52 The Auditor-General specifically made the point that the external scrutineers are not regulators.46 To the Committee, this confirms that the ATO is under no obligation to act on scrutineer recommendations.

3.53 A majority of stakeholder submissions argued that current levels of scrutiny of the ATO should be maintained or perhaps increased, especially in relation to the role of the Inspector-General. This was sometimes put in terms of the ATO’s powers, the importance of its role, and sometimes supported on the basis that the Commissioner’s reinvention project was still a ‘work-in-progress’. It was also put it in the context of uncertainty caused by changing tax laws.47 H&R Block stated:

Broadly, the ‘earned autonomy’ principle is based on the concept that high performing organisations which demonstrate positive outcomes are rewarded with less rigorous oversight. Whilst recognising that such a concept may be appropriate in some government agencies, we are not convinced that the agency which manages the whole federal tax system and therefore plays a key role in the lives of every Australian, should be one of them.

Certainly, we do not believe that the overwhelming bulk of taxpayers would believe it to be in their interests for the ATO to be subject to less rigorous oversight. In an organisation the size of the ATO and with the legal powers of the ATO, many would see such

a path as highly inappropriate and an abdication of the requirement to maintain accountability to taxpayers.48

3.54 The Australian Financial Markets Association (AFMA) more broadly considered the general relationship between internal controls and external scrutiny. It argued that internal and external controls should be regarded as complements, rather than substitutes. If ‘External scrutiny provides an incentive to improve internal risk management,’ then removing external scrutiny may result in internal controls being misdirected.49

Committee comment

3.55 The Committee acknowledges that the ATO is a well-run organisation and has acted upon many aspects of its 2013 Capability Review. The Committee also accepts that the Public Governance, Performance and Accountability Act 2013 (PGPA Act) provides a timely opportunity for agencies to consider risk in a more balanced way.

3.56 However, the operation of differential regulation is still under development and the PGPA Act deals with internal government regulation rather than external scrutiny. The PGPA Act primarily applies to financial management and performance reporting, and also deals with the relationship between the Finance Minister and accountable authorities (governing bodies and agency CEOs).

3.57 The term ‘differential regulation’ is technically not applicable to external scrutiny, as the scrutineers are not regulators. Differential scrutiny may however be an applicable concept.

3.58 Indeed, differential scrutiny is already in practice, although the term ‘risk based approach’ is more commonly used. All scrutineers take the ATO’s risks into account when designing their forward work programs and specifying their individual audit details. Their assessments of risk are informed from a combination of sources, including: an analysis of the ATO’s performance; stakeholder feedback (including feedback from the Parliament); and knowledge of the ATO’s internal systems and processes.

3.59 The Committee notes the comments of stakeholders that the ATO’s size and powers argue against any reduction in external scrutiny. The Auditor-General made a similar point. Stakeholders also receive a great deal of comfort from knowing that the ATO is subject to external scrutiny. The Committee finds these arguments very persuasive.

48 H&R Block, Submission 6, p. 3. 49 AFMA, Submission 19, p. 3.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 37

3.60 The Committee sees no compelling case for change in the way the ATO is examined from a differential scrutiny perspective.

Specific issues

Communication between the ATO and Inspector-General

Background

3.61 An important part of external scrutiny is that the scrutineer and agency engage in a full and frank exchange of views before, during and after a review. This allows informed decisions about which reviews to commence, allows expectations to be realistic, enables the review to be conducted efficiently, and maximises its effectiveness.

3.62 However, evidence during the inquiry indicated that both the ATO and the Inspector-General considered that communication during reviews could be considerably improved.

3.63 On the part of the ATO, they indicated to the Committee that they were unclear about how the Inspector-General selected review topics because they were not involved in the process whereby the Inspector-General receives stakeholder feedback:

… the processes that led to the Inspector-General deciding to inquire into something are not transparent to us … The Inspector-General, quite appropriately, has his or her own powers to decide where to inquire into things, and they receive information, advice, complaints, feedback from people. We are not always privy to the information that has caused them to inquire into particular areas … That is not a process that we are necessarily involved in …50

3.64 The ATO claimed that the Inspector-General did not always take on board their comments on draft reports.51 However, the ATO admitted that they then accepted recommendations that they did not support on the basis that ‘there has been an expectation that we would agree to a great majority.’52

With great respect to the Inspector-General, we would say that the ANAO scrutiny is much more effective because there is more dialogue and two-way conversation. We have not had that lived experience in recent times with the Inspector-General …53

3.66 In evidence, the Auditor-General confirmed that he had a positive relationship with the ATO, stating ‘Our relationship with the tax office is strong.’54

3.67 On the part of the Inspector-General, his submissions outlined examples where he worked with the ATO in developing his work program and indeed amended the program based on ATO feedback:

… as a result of such consultations, the IGT has previously taken on board suggestions by the ATO to review certain areas of concern, as was the case with the IGT review into Private Binding Rulings as well as the ADR Review … or not conduct a review where the ATO had advised that it was undertaking its own internal review and improvements.55

3.68 The Inspector-General also raised examples where the ATO could improve its communication during reviews.56 These are the five dot points listed above in the discussion of cost to government and they include the ATO vigorously defending strongly held views and undertaking its own parallel reviews during an Inspector-General review.

3.69 Stakeholders usually did not comment on review communication. The exception was Chartered Accountants, who recommended that the Committee cover the issue in the inquiry.57

Analysis

3.70 The Inspector-General provided the Committee with detail on how he constructs his work program. This material was originally provided to the JCPAA in December 2012 and published by that Committee. Broadly, the Inspector-General holds an open, advertised consultation to develop the program. Consulted parties included:

ï® professional bodies, taxpayers, law and accounting firms, and industry

associations

ï® the JCPAA

ï® the Assistant Treasurer and Treasury.58

3.71 Specifically regarding consultations with the ATO in development of the work program, the Inspector-General stated that:

ï® prior to the formal public announcement of the work program, a final

draft version of the document is presented to the ATO senior executives…

ï® at these meetings, the IGT provides some insight to the ATO senior

executives with a snapshot of the issues which have been brought to the IGT’s attention and to seek their direct feedback on topic areas for review.59

3.72 The Inspector-General also provided the Committee with a timeline of consultations with the ATO during a review. This timeline is on the next page. The pattern for ATO consultations throughout the course of a review are:

ï® two meetings during planning - including allowing the ATO to

comment on draft Terms of Reference

ï® ad hoc workshops during the review to discuss issues

ï® weekly meetings between ATO contacts and IGT review officers

ï® monthly meetings between the ATO and senior IGT staff

ï® three opportunities to comment on the report in its various stages.

Figure 3.1 External engagement during reviews by the Inspector-General of Taxation

Source IGT, Submission 23.2, p. 45.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 41

3.73 At the hearing, the Office of the IGT expressed a readiness to work further with the ATO on communication. They suggested that there is an important history to ATO scrutiny that informs current arrangements:

I think there is benefit in having greater communication with the ATO senior management around some of the scrutineering issues, because I think there is a degree of education that will be helpful. I am not trying to talk down; it is just that I think there is a history associated with the agencies, the work that has been done and why some of it is where it is that may not be obvious at first instance. I think improved communication around those kinds of issues would be very important.60

3.74 Further, in their submission the Inspector-General stated that better communication could better streamline reviews, and that the agencies are looking to refresh a protocol guiding the conduct of reviews:

The IGT believes that through better project management, commitment to engage and openly share information and views, the ATO and IGT could better streamline the review process to reduce the risk of duplication and inefficiencies, thereby minimising the impact on costs and resources. To this end, and given the recent changes to the IGT Act 2003 and its core functions, both agencies are looking to refresh the IGT-ATO Protocol that had previously guided the conduct of systemic reviews.61

Committee comment

3.75 The Committee is concerned about the state of communication between the Inspector-General and the ATO. Despite ATO evidence that was less dialogue and two way communication than in the case of ANAO reviews, evidence provided by the Inspector-General indicated that there is a large number of opportunities for communication both before and during reviews. This suggests that it is not the frequency, but perhaps the quality of communication and actions stemming from it that are the issues.

3.76 Communication between the Inspector-General and the ATO needs to improve. If communication over the past few years had been better, then this inquiry would probably have not been necessary. The Committee expects that better communication would also reduce ATO costs during

inquiries. If ATO costs dropped, stakeholders see an opportunity for the extra resources to be allocated to better stakeholder engagement.62

3.77 The Office of the Inspector-General expressed readiness to communicate more with the ATO. The Committee anticipates that the ATO is of a similar view. The Committee therefore recommends that the two parties take this opportunity to redouble their efforts to communicate better. In this regard, the Committee also encourages the agencies to finalise refreshment of their Protocol for conducting systematic reviews.

Recommendation 3

3.78 The Committee recommends that the Australian Taxation Office and the Inspector-General of Taxation redouble their efforts to improve communication before, during and after reviews.

The position and role of the Inspector-General of Taxation

Background

3.79 A majority of submissions supported the position of the Inspector-General. H&R Block referred to that officer’s ‘highly regarded work’. The Institute of Public Affairs stated that its establishment was ‘a fine reform.’ Taxpayers Australia advised that its members have commended the performance of the Inspector-General. The Tax Institute, Institute of Public Affairs, and the Corporate Tax Association noted that the Inspector-General’s work has led to improvements in tax administration.63

3.80 The Committee also received suggestions from stakeholders that the Inspector-General’s role should be widened, either through increased resources or increased powers.64

3.81 Some submissions preferred a smaller role for the Inspector-General. The ATO omitted the Inspector-General from its preferred scrutiny framework. CPA Australia suggested that the Inspector-General’s power to initiate systemic reviews could be discontinued. COSBOA stated that

the role of the Inspector-General could be reconsidered, given that ‘some of the language from the IGT over the years has been over the top in its criticism of the ATO’. COSBOA also noted there was a risk that the Inspector-General, as a single agency scrutineer, might ‘end up justifying its existence rather than delivering an outcome’.65

3.82 Similarly, the Commonwealth Ombudsman expressed concern about creating an oversight body that covered a small number of agencies. One of the risks was that the scrutineer would not be able to take the middle ground and either be captured by the agency or become antagonistic towards it:

In my view, there is significant risk in creating an oversight body with responsibility for only one or two agencies. Such arrangements result either in a dysfunctional and antagonistic relationship between the oversight body and the agency, or in the oversight body being captured by the agency.

That relationship problem can, in my opinion, develop from the suggestion that a single agency complaint handler should have on its staff specialists in the business of the agency. This can lead to the complaint handler second guessing the agency’s decisions, which should not be its role.66

3.83 Another of the risks presented by the Ombudsman above is that specialist expertise for a scrutineer can result in the scrutineer ‘second guessing’ the agency’s decisions. However, two stakeholders were of the view that the Inspector-General’s specialist expertise was beneficial.67

3.84 The Committee received a range of suggestions on how the Inspector-General and the other scrutineers could be more effective. These included:

ï® reviewing current arrangements, in some cases with a view to reducing

the number of external scrutineers68

ï® better communication and coordination among scrutineers69

ï® more forward looking reviews by the Inspector-General, in some cases

ï® the ATO sharing more of its risk information with scrutineers to reduce

the need for a review to be conducted71

ï® caps on reviews72

ï® minimum time periods before revisiting a topic73

ï® fewer reviews with broader subjects74

ï® clarifying the roles of scrutineers, including a ‘lead agency’ system.75

Analysis

3.85 The Committee would like to say up front that it believes that the office of Inspector-General should continue. This office has proven its worth through quality reviews that have improved the ATO’s operations and the position of taxpayers, especially given its small size relative to the ATO. Further, it has strong support among almost all stakeholders. The Committee puts this down to the fact that the Inspector-General has built strong relationships with taxpayers and tax practitioners.

3.86 The Committee notes that other scrutineers do not work this way. However, the complexity of the tax system, and the substantial resources and powers of the ATO, mean that a role for the Inspector-General, or at least a scrutineer that pledges to reach out to taxpayers, should continue for the foreseeable future.

3.87 CPA Australia noted that the new role for the Inspector-General was still bedding down, and the Inspector-General did not have the opportunity to deliver on the potential efficiencies from taking over the complaints function for tax administration.76 This suggests to the Committee that no changes are warranted to his Act and the Committee is happy to proceed on this basis.

3.88 The Committee appreciates the input that stakeholders and the ATO provided in terms of improvements that could be made to how reviews are selected and conducted. Some of the suggestions, however, such as

caps on reviews and minimum time periods before revisiting a topic, would limit the scrutineers’ discretion. The Committee does not support these suggestions and believes it is important that the scrutineers retain flexibility to allow them to prioritise their work and that it is consistent with their independence.

Committee comment

3.89 One of the features of the Inspector-General’s expanded role is that tax complaints and the means to systematically review them now sit within the same agency. Although the Inspector-General has always extensively consulted on his work program, there is the opportunity to conduct shorter, more timely reviews based on complaints data. Not only did some stakeholders suggest this, but both the ATO and Inspector-General did as well. Based on this consensus, the Committee is happy to present it as a recommendation.

Recommendation 4

3.90 The Inspector-General of Taxation examine opportunities to conduct targeted reviews based on complaints and emerging issues in tax administration, and work with the Australian Taxation Office to develop a mutually efficient system for such reviews.

3.91 The Committee notes the structural issues raised by the Ombudsman and the fact that a specific scrutineer may have difficulty taking the middle path with the agencies it is responsible for. The Committee acknowledges that this is a risk which must be managed.

3.92 One way of managing this risk is to build on current processes, in particular the biannual hearings that this Committee holds with the Commissioner of Taxation, and which the Inspector-General attends. These hearings can be expanded to also scrutinise the Inspector-General at minimum additional cost to all parties. Alternatively, the Committee may choose to conduct a separate dedicated regular inquiry into the annual report of the Inspector-General. Such an inquiry would provide a forum for the Inspector-General to raise matters of significance to his office directly with parliamentarians, and would also allow additional scrutiny of the Inspector-General’s efficiency, effectiveness and impartiality.

46 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

Recommendation 5

3.93 The Committee recommends that the Standing Committee on Tax and Revenue of the next Parliament consider expanding its biannual inquiries into the Australian Taxation Office to include scrutiny of the Inspector-General of Taxation, or alternatively to conduct a separate dedicated regular inquiry into the annual report of the Inspector-General.

The role of this Committee

Background

3.94 Taxation and tax administration have often been a focus of Parliamentary scrutiny. A landmark inquiry was 1993's An Assessment of Tax conducted by the then Joint Committee of Public Accounts (JCPA). Shortly thereafter followed an inquiry in 1995 to discuss progress of the Tax Law Improvement Project, which was a product of the 1993 inquiry.

3.95 In 2005 the JCPAA resolved to conduct a long term inquiry into administration of the tax system, culminating in 2008's report Tax Administration. During the inquiry, the Committee met with the Commissioner of Taxation biannually. After the 2008 report, the Committee continued to hold biannual hearings with the Commissioner. The hearings were then expanded to include other witnesses and held on an annual basis from 2012.

3.96 This Committee was created in late 2013 and, after corresponding with the JCPAA to avoid duplication, has held biannual hearings with the ATO, commencing in February 2014.

3.97 This inquiry has allowed the Committee to obtain some feedback on its work. At the biannual hearing in February this year, the Commissioner of Taxation stated that this Committee could play a role in constructively scrutinising the ATO:

This committee is relatively new and has been added to all the existing levels of scrutiny that we at the ATO already have. However, I do believe that this committee can play an important role in the right scrutiny of the ATO and help create a modern tax office that is a leading administration envied by other countries.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 47

3.98 Some submissions were similarly supportive of the Committee.77 Others suggested that the Committee could do more to follow up scrutineer reports, similar to the recommendations in the Australia's Future Tax System Review.78 CPA Australia suggested that the biannual hearings with the Commissioner of Taxation could change to annual hearings or be discontinued.79 There were also suggestions that there was scope for better organisation and clarity around the work of parliamentary committees.80

Committee comment

3.99 The Committee appreciates the feedback from stakeholders and the ATO. The strength of committee reports leverages off the expertise that agencies and stakeholders put on the public record. The Committee sees an opportunity to use this feedback to strengthen its relationship with the community of tax practice and to improve future hearings with the Commissioner of Taxation.

3.100 The Committee also acknowledges the value that parliamentary committees can generate from following up scrutineer reports. This has been a long standing practice for the JCPAA in relation to the Auditor-General's work. Indeed, one of this Committee's inquiries this Parliament was into an Auditor-General's report on the Tax Expenditures Statement. The Committee is open to conducting further inquiries of this nature and looks forward to ongoing dialogue with the scrutineers about their work.

3.101 The Committee is also conscious of the costs it can place on stakeholders through its inquiries, in this case on the ATO. In a similar way to other scrutineers, the Committee attempts to apply a risk based approach in deciding where to focus its lines of inquiry, with a view to producing meaningful outcomes for the agencies involved and for broader stakeholders. The Committee notes in particular the suggestions by Chartered Accountants that the Committee facilitate greater input into and prior notification of the topics for discussion in regular ATO scrutiny hearings. The Committee will consider implementation such suggestions in future hearings.

3.102 The issue of a board for the ATO was not specifically covered in the inquiry’s terms of reference. However, it is relevant to the inquiry because some stakeholders see a board (or absence thereof) as a potential part of the ATO’s accountability framework, albeit internally, rather than externally.

3.103 Three types of board have been discussed over time for the ATO:

ï® an advisory board, which is not responsible for an organisation’s

operations, but can provide advice to senior management on issues such as information technology, strategy and culture

ï® a management board, similar to that found in companies, that is

responsible for the management of the agency, although in revenue agencies it is typically not responsible for decisions made about individual taxpayers

ï® a policy board, that provides advice to key parties (ministers,

departments of state and the revenue agency) on tax policy. The Board of Taxation was established in 2000 for this task.

3.104 A number of submissions discussed whether the ATO should have a board. Ernst & Young and AFMA supported an advisory board, consistent with recommendation 115 of the AFTS Review. The Institute of Public Affairs and Taxpayers Australia supported a management board that would have some responsibility for the ATO’s operations.81

3.105 In the past, the Inspector-General of Taxation has supported ‘a management board (such as those of an advisory or supervisory nature)’.82 In evidence, the Inspector-General commented that a board would be especially useful for long term planning:

At the moment you have the commissioner and then there are second commissioners and really most things are at the discretion of the commissioner. Whereas, ASIC and APRA have boards. The revenue agencies in the US, Canada and the UK—countries with which we compare ourselves—all have boards. Those boards do

not get involved in what scrutineers do; they are about long-term planning. For example, they might look at where they might want to be in terms of IT in 10 years’ time and then they would have a plan for getting there.

… you would have your commissioner and your second commissioner but, in addition to that, you might have a finance person, a human resources person and an IT person external to the ATO who would also provide further insight into how you manage such a large organisation.83

3.106 The Law Council of Australia did not express an opinion about a board type, but suggested that the creation of a board would not be a reason to reduce the external scrutiny of the ATO.84

3.107 The preferred governance structure of the ATO is usually discussed in tax reviews. In 1993, the JCPA (the precursor to the JCPAA) issued a comprehensive report on the tax system. The Committee came to the view that there was an ‘accountability gap’ in the Commissioner’s exercise of tax powers because the Commissioner cannot be instructed in how to exercise them and is less accountable to the Parliament than a minister. The Committee recommended that the relevant minister be given the power to issue general directions to the Commissioner, and that they be tabled in the Parliament.85

3.108 The Committee also noted the two main consultation committees that the ATO had established from the early 1980s to open up the tax system. These were the National Taxation Liaison Group and the Commissioner’s Advisory Panel. The former focussed on tax practitioners (and still does) and the latter was more broadly based. Among its recommendations, the Committee suggested that the role of the advisory committees be formalised and strengthened.86

3.109 The idea of a taxation board was raised in the Review of Business Taxation in 1999. This Review considered two options: a policy board and a management board. The Review rejected a management board because it would interfere with the clarity of responsibility between a statutory authority and its minister. It took the view that the opportunity to allow business involvement in developing tax policy would provide greater certainty and less possibility for conflict in the later application of those

laws. Therefore, the Review recommended the creation of a Board of Taxation for policy consultation, which has been implemented.87

3.110 The AFTS Review in 2009 also covered the issue of a board, finding that an advisory type board would be the most appropriate option for Australia. The Review found support in submissions for the creation of a board, and noted that the revenue agencies in the United States, United Kingdom and Canada had them. In none of these cases did the board interpret the tax laws or make decisions about individual taxpayers.88

3.111 The AFTS Review also noted the 2003 Uhrig review of corporate governance of public sector authorities, which argued against a management board for statutory agencies because it would interfere with the line of accountability between the agency and the minister. Therefore, the AFTS Review recommended an advisory board for the ATO on the grounds that it would expand the range of skills and experience available to the organisation but maintain some clarity of responsibility. The report stated:

This would usefully add to, formalise and elevate the existing consultative arrangements that support the Commissioner’s management of the ATO … This should not be seen as a criticism of the current management of the ATO. Rather, the Review’s aim is to put the ATO in the best possible position to meet the significant challenges of the future. Though the current management arrangements have served the system well in the past, the pace and significance of changes to the ATO’s work mean that it could benefit from additional management arrangements that offer an even greater range of expertise and perspectives.89

3.112 The 2013 Budget had an expense measure for creating an advisory board for the ATO. The Committee is not aware of any further action since.90

Committee comment

3.113 A board for the ATO is part of its internal controls and governance, no matter whether the board is of an advisory or management nature.

87 Review of Business Taxation, A Tax System Redesigned: More certain, equitable and durable, July 1999, pp. 119-23. 88 AFTS, Report to the Treasurer, Part Two, Detailed Analysis, volume 2 of 2, December 2009, p. 664. 89 AFTS, Report to the Treasurer, Part Two, Detailed Analysis, volume 2 of 2, December 2009, p. 665. 90 The measure was to be met within existing ATO resources. The Hon Wayne Swan MP, Deputy

Therefore, it would not be part of its external scrutiny and the topic is outside the Committee’s terms of reference.

3.114 The Committee notes that the Board of Taxation was established in 2000 to provide policy advice.

3.115 The Committee also notes that although an advisory board has not been established following the 2013 budget measure, the ATO renewed its consultation processes for advice on individual tax issues in 2013. It now has a smaller number of standing groups and has established a Consultation Hub to manage the consultations on specific matters.91

3.116 Although not the same as an advisory board, the Capability Review in 2013 provided high-level strategic advice to the ATO about its internal governance, culture and capacities. It has enabled organisation-wide improvements and formed the start point for the Reinvention Program. Future Capability Reviews may be warranted, and may be an alternative to an advisory board for providing organisation-level advice and helping to set the ATO’s direction, albeit only every five to 10 years.

3.117 The key question in this inquiry is how an internal mechanism, such as a board, affects external scrutiny. AFMA noted that internal controls and external scrutiny are complements, rather than substitutes.92 Therefore, establishing a board may have little effect on external scrutiny. The Law Council concluded that establishing a board for the ATO ‘would not warrant the removal of existing levels of external scrutiny’.93 The Committee endorses this statement.

ATO culture and reinvention

3.118 The ATO is engaged in a program of renewal which it calls Reinventing the ATO. It aims to be known for its service, expertise and integrity. A number of stakeholders have put on record their recognition of the changes taking place. For example, the Group of 100, an organisation of chief financial officers from large corporations, commented on the ‘transformative work’ of the Commissioner, and especially the newly collaborative approach of the ATO.94

3.119 Chartered Accountants also commented favourably on the recent undertakings of the ATO:

… the ATO has embarked upon an ambitious and challenging change program (known as Reinventing the ATO) at the same time as addressing a number of developments which have the potential to undermine confidence in the Australian taxation system … There are also senior ATO personnel currently assisting Treasury with a number of important projects … particularly at this challenging stage in the ATO’s history, management needs some clear air.95

3.120 However during the inquiry, the Committee also received a number of systemic complaints about the ATO. One example was raised by tax lawyer Graeme Halperin, who found difficulty in arranging for the ATO to engage in mediation during tax disputes. The advantages of mediation are obvious. Disputes can be resolved earlier and at less cost. At the minimum, mediation can narrow down a dispute to the key issues. Mr Halperin, who practices law in a range of fields, stated that mediation ‘is now part of the dispute resolution culture … except when engaging with the ATO’. He claims that mediation teams in the ATO are ‘sidelined’ by other ATO officers, and that alternative dispute resolution is resisted when it is requested. He suggests that ATO officers are ‘unfamiliar and uncomfortable’ with the approach of settling disputes as early as possible.96

3.122 Mr Halperin also raised the issue of enforcement and debt collection. This area can be fraught. Taxpayers may have a legitimate point to raise, but can find themselves in financial difficulty during a dispute and unable to fund their representation. However, if the ATO has reasonable concerns about a taxpayer’s compliance, then compliant taxpayers would expect the ATO to make full use of its enforcement powers.

3.123 Mr Halperin’s concern was that ATO audit teams can spend considerable resources assessing a taxpayer’s liability without taking into account their capacity to pay. The assessment may be accurate, but it may result in nothing but an accounting problem because the taxpayer cannot pay.98

3.124 Independent Contractors Australia raised concerns about how the ATO determines whether a taxpayer is an employee or contractor. They argued

that the definition is clear ‘at law and in practice’, and the ATO has a checklist of 11 items to determine it, but that ATO officers had ‘a high level of suspicion’ about self-employed people and whether they are businesses. 99 They apply their own ‘smell test’ rather than the law.100 Independent Contractors Australia noted that the Commissioner of Taxation has claimed that the ATO ‘is more understanding and is working with small business people’, but they claimed that the situation is deteriorating.101 Their view was:

… that the ATO cannot be trusted to act fairly, or even to act within the law … in relation to small business people and that, as a consequence, increased scrutiny and oversight of the ATO is required.102

3.125 Independent Contractors Australia also asserted that the ATO makes allegations of fraud which are unsubstantiated and where details are not given—a denial of procedural fairness. They argued that the ATO is not acting within the law in many of these cases, but a small business so accused cannot afford legal representation. The fraud accusations in turn allow the ATO to review multiple years of past tax returns, not just the two years or four years that are usually available for review. It then issues large tax claims and penalties.103

3.126 The Committee notes that, at the hearing, the ATO offered to independently review any cases provided by Independent Contractors Australia.104

3.127 Ernst & Young noted that small businesses in particular may be adversely affected by the compliance activities of the ATO. They conceded that the ATO needed to have wide ranging powers, but said that small businesses had been intimidated by extended disputes with the ATO. They argued:

Small businesses often do not have the cash flows or resources to deal with the ATO and disputes can lead to potential insolvency of the business or bankruptcy for the individual taxpayer, regardless of the merits of their position.105

3.128 However, the submission of the Institute of Public Accountants noted that the ATO’s program of reform was working, even though there could still be problems:

There have been instances over the years of the ATO being dismissive of feedback, particularly where it conflicts with a strongly entrenched position. This is less likely to be the case today given the significant cultural changes in the ATO of late, but given the sheer size of the organisation, there still remain pockets that are slow in adapting.106

Committee comment

3.129 The Committee notes that many of the issues that have been raised in these submissions also arose in the Committee’s inquiry into tax disputes, which focused on small taxpayers and individuals. It identified particular concerns with regard to the ATO’s poor engagement with taxpayers before escalating disputes, and where the burden of proof lay in fraud and evasion cases.

3.130 The Committee reinforced an earlier recommendation by the Inspector-General of Taxation, that the ATO should consider whether to engage in direct conferences with taxpayers at multiple points in a dispute. This is in the process of implementation.107

3.131 It also recommended, among other things, that:

ï® findings or suspicion of fraud or evasion be made only by Senior

Executive Officers of the ATO

ï® allegations of fraud be made only when evidence of fraud clearly exists

ï® allegations of fraud or evasion should be addressed as soon as

practicable in an audit or review.108

3.132 The ATO undertook to examine these recommendations.109

3.133 The Committee also recommended that the Government introduce legislation to place the burden of proof on the ATO in relation to

106 Institute of Public Accountants, Submission 24, p. 1. 107 Australian Government, Australian Government response to the House of Representatives Standing Committee on Tax and Revenue report: Tax disputes, December 2015, p. 12. 108 House of Representatives Standing Committee on Tax and Revenue, Tax disputes, March 2015,

p. xviii.

109 Australian Government, Australian Government response to the House of Representatives Standing Committee on Tax and Revenue report: Tax disputes, December 2015, p. 10.

REVIEW OF EVIDENCE AND COMMITTEE FINDINGS 55

allegations of fraud and evasion after a certain period has elapsed. This recommendation was not accepted.110

3.134 The Committee reiterates its earlier comments in support of mediation and early engagement, and its previous recommendations to do with the handling of accusations of wrongdoing.

3.135 In the tax disputes report, the Committee also recommended that the ATO develop a measurable indicator of taxpayer perceptions of fairness in tax disputes.111 The ATO has done so, and is generating reports which are useful in supporting the changes suggested above. The Committee commends the ATO for producing this important performance measure.

3.136 Overall the Committee believes that the ATO is in the process of a genuine cultural change, and accepts its statement that:

3.137 The Committee believes that a change in the culture of a large organisation such as the ATO can take years, and that the senior management and the external scrutineers need to be constantly vigilant over the process during that time for it to come to fruition.

3.138 Whilst recognising that significant cultural change takes time, the Committee also believes there are remaining genuine concerns amongst stakeholders. The Committee has highlighted some of the concerns raised in submissions to highlight that completion of the reinvention program is critical to improving the outcomes for taxpayers.

3.139 The Committee further commends the Commissioner of Taxation on the breadth of reform that he has undertaken and the significant achievements to date. The Committee encourages continued action and looks forward to seeing the positive outcomes that cultural change will bring to the ATO and its stakeholders.

2014 Complaints and other feedback Compliance of High Wealth Individuals Compliance effectiveness methodology Australian Business Register Compliance of large corporates Administration of contact centres

Source Websites of the respective organisations. * indicates a review is in progress.

66 EXTERNAL SCRUTINY OF THE AUSTRALIAN TAXATION OFFICE

E

Appendix E - 2012 response by scrutineers

The response is on the following pages.

I

EXECUTIVE MINUTE

on

JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT REPORT 426 Ninth biannual hearing with the Commissioner of Taxation

General comments

In its report on the ninth biannual hearing with the Commissioner of Taxation, the Joint Committee of Public Accounts and Audit (the Committee) considered the respective roles

and responsibilities of the ATO's external scrutiny organisations (Australian National Audit Office, the Commonwealth Ombudsman and the Inspector-General of Taxation).

The Committee noted the high quality of existing scrutiny activity. However, in the context of continuous improvement, the Committee requested further analysis as to the possibilities for more strategic planning and improved information sharing between the agencies. The Committee recommendation is set out below.

Recommendation No.4 paragraph 1.152 The Committee recommends that the external review agencies investigate and report on opportunities for more strategic planning and improved information sharing as they undertake their reviews to avoid duplication of their efforts and the Australian Taxation Office's resources.

The recommendation has been actioned. The three external review agencies will meet collectively as part of their annual planning processes to share information and consider

more broadly the overall ATO review activity. This enhances the current bilateral consultative processes in place. Within the boundaries of the respective legislative frameworks, consultation between the agencies on review activity will continue to be undertaken as appropriate.

Date: 30 May 2012

Ali Noroozi Inspector-General of Taxation

Alison Larkins Acting Ombudsman

Ian McPhee PSM Auditor-General

Supporting information

The following information is provided to support the agencies' joint response. It provides an overview of the agencies' current joint review arrangements, and a summary of the three agencies' roles and responsibilities.

As noted by the JCPAA in its report, the review activities conducted by the three agencies provide confidence to the community in the robustness of the tax system. Importantly, in developing this response, the agencies did not identify any specific issues of duplicated review activity or issues arising from an inability to share information. However, having

regard to future possibilities, the three integrity agencies have committed to continue to explore opportunities to improve the scrutiny system.

Review of existing cooperation arrangements between the three external scrutineer agencies

The planning processes of the ANAO, Ombudsman and IGT include consultations on a

bilateral basis. This consultation provides an opportunity to share information about potential audit and review themes, to identify common areas of interest and avoid duplication of effort. This current approach has been useful, and maintains the independence of each statutory officer in exercising their functions or powers. The IGT is

obliged to consult annually with the ANAO and Ombudsman under the Inspector-General of Taxation Act 2003 in developing his work program, while the ANAO and Ombudsman meet as a matter of good practice. All three agencies also consult with the ATO on their proposed work programs.

Opportunities for sharing information obtained in the course of a review or audit are limited by the legislation applicable to each agency. The relevant provisions are:

â¢ Section 36 of the Auditor-General Act 1997-Confidentiality of information;

â¢ Section 35 of the Ombudsman Act 1976-Officers to observe confidentiality (noting that the Act also allows the Ombudsman to disclose information in the broader public interest); and

Within the boundaries of the legislative framework, consultation occurs between the agencies. A recent example involving all three external scrutineers related to the reviews of 'Project Wickenby', a multi-agency taskforce led by the ATO to investigate internationally promoted schemes to avoid or evade Australian taxes and launder money. Other examples of cooperation include liaison between the IGT and the ANAO whilst conducting

assessments of the ATO's administration of Small to Medium Enterprise taxpayers and between the IGT and the Ombudsman whilst the IGT was reviewing the ATO's Change Program.

The agencies will seek ways to enhance their consultative processes in the context of the Committee's recommendation. In particular, there is an opportunity to improve planning by adding a three way component to the annual consultative arrangement, and take a more holistic perspective during this process.

2

Roles and responsibilities

of the external scrutineer agencies

As noted in the JCPAA report, each of the scrutiny bodies has a mandate to consider

different aspects of the work of the ATO:

â¢ The Auditor-General undertakes, in addition to financial statement audits, a range of performance audits that examine the efficiency and effectiveness of public administration;

â¢ The Commonwealth Ombudsman is also the Taxation Ombudsman and can investigate the fairness of actions and procedures of the ATO in response to complaints from taxpayers in relation to tax administration or of their own motion; and

â¢ The Inspector-General of Taxation reviews systemic issues in tax administration and makes recommendations for improvement.

To a large extent, these roles are complementary in that together they provide Parliament and the public with appropriate assurance that tax systems are administered in a fair, effective and efficient way.

Auditor-General

The Auditor-General is an independent officer of the Parliament, supported by the ANAO to provide the Parliament with independent assessments of selected areas of public administration, and assurance about public sector financial reporting, administration and accountability. In addition to financial statement audits and assurance reviews, the Auditor-General is responsible, under s.15 of the Auditor-General Act 1997, for conducting performance audits of Australian Government public sector agencies, including the ATO,

and under s.18 for the review or examination of particular aspects of the operations of the whole or part of the Commonwealth public sector (i.e. cross-agency performance audits) which may include the ATO. The objectives of this work include promoting performance improvement and accountability of the administration of Australian Government programs

and entities. The ANAO does not exercise management functions or have an executive role.

The ANAO has extensive powers of access to Commonwealth documents and information, and its work is governed by the Auditor-General Act 1997 and the standards applied by the auditing profession in Australia. In accordance with these standards, performance audit,

financial statement audit and assurance review reports are undertaken to provide a reasonable level of assurance. Confidentiality of information is mandated under s.36 of the Auditor-General Act 1997, and this provision effectively prohibits ANAO staff from sharing information during the conduct of audits.

The Auditor-General has absolute discretion in the exercise of his functions or powers, including the selection of topics for performance audits and the manner in which they are to be conducted. When developing the annual Audit Work Program, the Auditor-General must, under s.10 of the Auditor-General Act 1997, have regard to the audit priorities of Parliament, as determined by the JCPAA under the Public Accounts and Audit Committee Act 1951, and any reports made by the JCPAA under the same Act.

The ANAO therefore adopts a consultative approach to developing its forward audit program, taking account of the advice of the JCPAA, as well as the views of client entities and other stakeholders. The program aims to provide a broad coverage of areas of public

3

administration and is underpinned by a risk-based methodology.

The ANAO's

consultation process is designed to ensure that its audit services not only meet the needs of Parliament but also assist entities to improve public administration.

The Ombudsman

The Commonwealth Ombudsman office was established by the Ombudsman Act 1976 (the

Ombudsman Act). Under s.4(3) of the Ombudsman Act the Commonwealth Ombudsman may be designated as the Taxation Ombudsman when dealing with matters relating to the ATO. The Taxation Ombudsman considers and investigates complaints about the administrative actions of the ATO, or can conduct an 'own motion' investigation, at their

discretion. In particular, through complaint investigation, the Ombudsman seeks to identify and respond to systemic issues in taxation administration.

The Ombudsman has a range of powers including being able to compel an agency to produce documents and examine witnesses under oath. Investigations are conducted in private, and most are conducted with minimal formality and on a cooperative basis.

Following an investigation, the Ombudsman will consider whether the actions of the department or agency were unreasonable, unlawful, improperly discriminatory or otherwise wrong. Through its investigations the Ombudsman seeks to improve government administration. The Ombudsman can make recommendations to agencies and can report on an investigation.

The Ombudsman seeks to work with all agencies, including the ATO, to improve their administrative systems and complaint handling processes on an ongoing basis.

Inspector-General of Taxation

The IGT is an independent statutory officer whose function is to review systems established

by the ATO or the tax laws, insofar as they are administrative in nature, and make recommendations to Government for improvement. The overall aim is to improve the administration of the tax laws for the benefit of all taxpayers. However, the IGT believes there is room for improvement in the ATO governance and scrutiny arrangements, and his views are set out in his submission to Federal Government's 2011 Tax Forum (refer to paragraph 1.148 -1.149 of the JCPAA Report)

The Inspector-General of Taxation Act 2003 sets out the functions and powers of the IGT. The IGT is appointed by the Governor-General and, effectively, is an arm of the Executive, reporting directly to Government, although accountable to Parliament as an independent statutory officer. The IGT does not deal with individual taxpayer matters, as these are handled by the Taxation Ombudsman.

In developing his work program, the IGT consults with a wide range of stakeholders, including taxpayers, tax practitioners and their representative bodies, the ATO, as well as the Auditor-General and Ombudsman.

While the IGT has discretion in setting his work program, the Government may direct or request the IGT to conduct a review. Additionally, the Commissioner of Taxation and either or both Houses of Parliament or a Committee thereof may also request the IGT to conduct a review. Overall, the IGT endeavours to review concerns with systemic tax administration issues, while ensuring the IGT's resources are directed to those areas of

4

most benefit to taxpayers overall. The IGT has strong powers to compel production of

documents by tax officials and to take evidence from tax officials where this proves necessary. This ensures that systemic tax administration issues can be rigorously pursued and examined. The IGT also seeks to identify relevant material to inform the consideration

on systemic issues and to avoid duplication.

Although the IGT can make recommendations for improvement, the IGT cannot direct the Commissioner of Taxation, other than to require the Commissioner to disclose information for a review. This means the statutory independence of the Commissioner is retained.

Before finalising reports on his reviews, the IGT must provide the Commissioner with reasonable opportunity to make submissions on any criticisms in his reports. Following this process, the IGT reports directly to Government. All reports are subsequently required to be made public by the Government within 25 Parliamentary sitting days.